Manalis Finance Co. v. Gedulig

Opinion

THOMPSON, J.

In this appeal, we consider the validity of the lien created by a notice of levy of unpaid California tax against the right of an assignee of Medi-Cal accounts receivable pursuant to a security interest perfected prior to the lien. We conclude that, since Welfare and Institutions Code section 14115.5 renders the assignment unenforceable against the State of California, the lien created by the notice of levy is valid and the assignee for security has no right to the funds which are the subject of the levy.

The facts of the case at bench are stipulated. On October 18, 1971, GAB Corporation, doing business as Manchester Community Hospital

[675]

(Hospital), assigned to appellant as security for a loan all of its present and future accounts receivable. The security interest of appellant was duly perfected by a filing with the Secretary of State. From October 18, 1971, until the date of trial, Hospital was indebted to appellant in an amount exceeding $50,000. Hospital failed to pay its unemployment insurance contribution for the second and fourth quarters of 1972 and the first quarter of 1973, and owed the California Department of Employment Development $14,384.37 by reason of that failure.

Hospital showed on its books “accounts receivable” representing Medi-Cal funds due it from Blue Shield Insurance Company (Blue Shield) in the amount of $14,384.37. Blue Shield had in its possession an equal amount which it had received as a “carrier” from the State of California in the form of Medi-Cal program checks. On August 21 and November 13, 1973, the Department of Employment Development issued notices of levy pursuant to Unemployment Insurance Code section 1755 naming Hospital as the tax debtor. The notices were served on Blue Shield demanding that it pay to the department any funds in its possession payable to Hospital.

Blue Shield delivered the $14,384.37 to the Department of Employment Development. Appellant filed a timely third party claim with the department pursuant to Code of Civil Procedure sections 689 and 689d. The department denied the claim. Appellant filed a timely petition for determination of its third party claim in the superior court, thus commencing the case at bench. The trial court concluded that the third party claim was properly denied and that the department was entitled to the funds as against appellant.